Kodak: Can Crunch Dead Ahead, Moody's Warns

Kodak is on course to run out of domestic cash between the second and third quarters of next year, Moody's analyst Rick Lane warned in a commentary this morning.

He notes that the company, which last week said it is seeking up to $500 million in secured funding to keep afloat while continuing to seek a buyer for its digital patent portfolio, continues to burn up cash.

The company ended the latest quarter with $852 million, down from $957 million in June.

"Reflecting historically positive seasonal cash flow in the fourth quarter combined with recently concluded intellectual property licensing agreements and non-core asset sales, we anticipate Kodak will end the year with approximately $1.3 billion of cash, with nearly $600 million of that total held domestically," Lane writes. "Trouble is, Kodak's operations consume significant cash in the first half of every year, and the company's third-quarter patterns also tend toward cash usage ... without material cash inflows over the near term from intellectual property sales or licensing agreements, or the additional secured funding that the company is currently exploring, the probability of a debt restructuring mounts."

Lane notes that a hearing in the company's patent infringement complaint against Apple and Research In Motion won't happen until December 30, and that a final decision could be delayed until well in 2012.

"For Kodak, this situation heightens the importance of realizing cash proceeds from the sale of more than 1,100 U.S. patents pertaining to capturing, processing, storing, organizing, editing and sharing digital images, as well as imaging monetization applications, which are fundamental to the digital imaging industry," he writes. "Those patents represent approximately 10% of Kodak's total U.S. patent portfolio, valued by various sources at well over $1 billion. Given Kodak’s precarious liquidity position and the delay in the RIM-Apple case, the company may well be challenged to sell its digital patent portfolio without first establishing a better liquidity position."

But he adds that "to achieve this by borrowing more secured money, however, will be credit negative even for unsecured creditors, who would be subordinated by the new more senior secured borrowings."

"The financing, if it materializes, would also likely consume the few remaining forms of alternate financing available to Kodak, somewhat akin to putting the last logs on the fire," he writes. "Unless Kodak finds some more liquid fuel in the form of cash proceeds from a patent sale or a favorable court ruling, the light that once illuminated America’s iconic maker of memories will fade from the picture."